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Creating a Stock Portfolio

ArticleID 115  
Writer Isaac Thuku
Category Personal Article

Let us review the important principles behind the stock selection processes that are relevant in formation and management of stock portfolios. What is it that makes a certain type of stocks more viable for a portfolio but not the next one? This calls for understanding of what types of stocks there are.

The commonly used categories of stocks are:

• Blue chip stocks.

• Income stocks.

• Cyclical stocks.

• Defensive stocks.

• Growth stocks.

• Speculative stocks.

• Penny stocks.

Blue chip stock is the most popular stock category. These stocks represent the best-known firms among the investment community. But it is difficult to define what exactly this category of stock, is. One common definition of Blue Chip Company is one with a long continuous history of dividend payments. For example, Coca Cola has a history of dividend payments for more than 100 years. But it doesn't mean that the younger successful companies running business for some decades and paying dividends can’t be categorized as “blue chips” in the specific investment environment. From another angle, many high quality stocks do not meet the criterion of uninterrupted dividend history. It is a practice that brokerage firms recommend for their clients – individual investors the list of blue chip stock as high quality ones in their understanding, based on the analysis of information about the firm.

Income stocks

They are considered a conservative, dependable investment, suitable to supplement other income. Well-established corporations with a consistent record of paying dividends are usually considered income stock. In addition, income stocks usually are those that historically have paid a larger-than-average percentage of their net income after taxes as dividends to their shareholders and the payout ratio for these companies are high. The common examples of income stocks are the stocks of public utilities.

Creating a Stock Portfolio
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